Consumer spending lit a fire under consumer discretionary stocks in 2015. Can spenders deliver again this year?
Consumers wined, dined, and bought lots of new cars last year, fueling the consumer discretionary stock sector to double-digit gains in a not-so-glamorous run of stock market trading. But will the sector, with all its fun and frolic, still have steam in 2016? The answer lies in the hands of the predictably unpredictable consumer.
If 2015’s consumer sector results are any indication, consumers emboldened by better job prospects and low gasoline prices will continue to spend more freely on material things that make them happy and keep them technologically fashionable and up to date.
In a year when financial markets dipped into the red in the final hours of trading, consumer discretionary shone. The Consumer Discretionary Index handily outpaced the nine other sectors of the S&P 500—posting a roughly 9% gain in 2015, according to S&P Capital IQ data.
Consumer discretionary stocks are considered "cyclical" stocks, or those that tend to wax and wane with expectations for economic growth. These differ from defensive sectors, which include stocks of must-have items like food, health care, and utilities—things consumers generally can't do without no matter what’s going on in the economy or with its outlook. The three biggest categories within the consumer discretionary sector are Internet retail, movies/entertainment, and restaurants, says Sam Stovall, managing director at S&P Capital IQ.
Historically, consumer discretionary stocks are early-cycle performers, gaining in a low or falling interest rate environment because they are credit-sensitive sectors of the economy. Wall Street's current expectation for a slow and measured pace of interest rate hikes in 2016 is not expected to derail the consumer discretionary sector—at least not right now. Many stock experts looking into the crystal ball for 2016 see continued strength in consumer discretionary stocks. But, as always, risks hang on the horizon as well.
Stovall outlines the potential positives for consumer discretionary stocks in 2016:
Of course, for every yin there is a yang, and Stovall warns of sector risks:
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